23 December 2012

Obamacare, And The Government's Cruel War On Innovation

originally appeared in Forbes:

As a young professor at Johns Hopkins I was around at the beginning of the academic study of health care costs. Over time it became clear that research support in the field was going to be circumscribed by a powerful and largely unspoken common objective. Foundations and federal research agencies were committed to the view that central control of payment would lead to lower costs and make the expansion of coverage possible.

Simply, national health insurance was the obvious objective, a view commonly but simplistically justified by reference to other “industrialized,” or “advanced,” or, “civilized,” countries. “Single payer” coverage evolved as the strategy to take the U.S. in this direction. The majority of research grants and demonstration programs were meant to show how government payment would produce more efficient and clinically effective care. Researchers would construct the path that would force the U.S. healthcare system to get right with history. The cost of this intellectual hegemony has been that Congress has had very little to draw on by way of credible alternatives to improving our system. The alternative case is hardly more than descriptions of the failures of the Canadian and British systems.

The inevitability of a national healthcare system has shaped the way Congress has attempted to regulate hospitals and doctors ever since the passage of Medicare and Medicaid in 1965. Two interrelated themes characterize all federal policy related to controlling costs ever since; namely, central planning and resisting technological innovation.

In 1974, the government set up a planning apparatus, advanced as a means to curtail health care cost inflation. One of its central aims was to constrain the development and application of new technology. Early on the government had determined that technology was the single most important factor in rising health care costs. This view was confirmed by European nationalized systems that worked hard to resist the proliferation of new technologies. The government’s first outing in planning under the 1974 statute was to retard the proliferation of the newly developed magnetic resonance imaging technology that subsequently proved to be the most powerful diagnostic tool since the introduction of x-rays, and the coming of today’s use of sophisticated genetic testing.

While medical technology has survived, largely on its ability to demonstrably improve clinical outcomes, its dispersion has been limited both in scope and scale by the federal government. Federal regulation of new drugs and devices has expanded hugely over the last thirty years. Indeed, many innovators and entrepreneurs never start new companies based on a promising new technology because they presume that ultimately the government will deny their ability to enter the market, or the process will be so long that their new company will never survive the wait. Through device regulation government has undeniably “chilled” innovation in health care.

Interestingly, government planning has distorted the use of the technology that does emerge as well. By concentrating new technology in hospitals where federal regulation could reach more readily than it could into doctors’ practices, hospitals play home to the most expensive technologies, such as the new proton beam therapy. With their greater ability to assume debt to pay for machines that may cost as much as a $500 million, our system encourages hospitals to buy the most costly technology, useful in a tiny number of cases. They often compete over who has the newest dramatic technology.

Meanwhile, older, less costly but more profitable technology escapes with government’s encouragement, to private outpatient settings. For example, same-day surgery for a wide variety of maladies is now performed in the mini-hospitals that many specialists’ offices have become. The result is decisionmaking by individual doctors relating to procedures from which they profit. The discipline once provided by hospital practice is gone; America is likely getting too much surgery as a result.

Not surprisingly Obamacare continues government’s dyspeptic attitude toward technological innovation. Next year the federal government is set to impose a 2.3 percent surtax on the sales of all medical technology. This move alone is a clear signal of the hostility that the government can send to a specific industry. But, the legislation proposes another aspect even less congenial to new drugs and technologies: Various government agencies are now empowered to establish a new threshold for judging products beyond the safety standards now in place. Clinical efficacy, judged using economic cost data, will have to be proved before new drugs and medical devices are approved. As I noted in my Fogarty Lecture at Stanford, this standard alone will greatly depress new innovation. A government that seeks to encourage innovation does not create multiple means to frustrate its champions.

But, Obamacare does encourage one innovation, if a concept well over three decades old can be called new. As part of a general strategy to control costs (and, it is argued, improve care) the government is mandating a new federal platform for “electronic” medical records. (The very language makes apparent just how old the technology is.). The idea is that an orthopedist in Aspen fixing a skier’s broken leg would benefit from knowing of her patient’s tonsillectomy in Buffalo twenty years before. Research suggests that electronic records are unlikely to save money or improve care in all but exceptional settings, such as the Mayo Clinic where all of one’s doctors practice in the same location. In the end, government would have access to and supervise the retrieval of everybody’s medical information. Maybe we can be trained that if we must break a leg, it would be best to do so on a weekday between 9 and 4 Washington time.

Obamacare reveals once again that our government seems incapable of seeing our economy as an integrated whole. Healthcare has been second only to design of chips and software as the most fecund area of innovation in the U.S. for many years. Tens of thousands of companies, millions of jobs, and many of the most incredible ideas that have translated into longer and more productive lives come from this sector. To think of purposively making it drink from the “shrink me” bottle has implications for the whole economy.

Recently when asked about layoffs in the health technology industry a government official said that Obamacare’s expansion of coverage should induce increased demand for care that will more than make up for the $20 billion in new taxes the industry will pay every year. Sounds like gravity-free economics. Thousands of years of trading have led businesspersons never to buy the proposition that losses can be made up by selling more, the more so when those loses are imposed by a government that has shown that it thinks what you make isn’t necessary.